Brett Arends had a fun post for MarketWatch titled, “Is this the perfect investment portfolio?” Arends works his way through some high level detail of his personal situation- from needing an investment portfolio just like anyone else, to his methodology, to the end product, and finally, to some expectations he has for the portfolio. He articulates his objective succinctly:
I want a simple investment portfolio that I don’t have to fool around with, and which I know maximizes my chances of earning a good long-term return, and minimizes my chance of ending up in the poor house.
I want an investment portfolio that is exposed to all likely environments, and committed to none. One based on intelligence and reasonable suppositions about the future, and not merely data mining from the past.
The result is 10% weightings to ten different “asset classes,” although I would say there are maybe four asset classes, but ten market segments. He gets broad global equity exposure through minimum volatility funds, some REIT exposure, commodity exposure through a natural resources fund (he explains this preference in the article), three bond market segments, and cash.
The use of the word perfect in the title is probably tongue-in-cheek, but could turn out to be ideal for him and for some of his audience (not an endorsement of the portfolio on my part, merely allowing for the possibility). It is, after all, global diversification across many asset classes, so it certainly could be sufficient, even if not perfect, or even if it turns out to be far from the best over the next 20 years, or any other relevant time frame.
Brett’s portfolio is, of course, similar to any number of portfolios we’ve looked at over the years: not unreasonably complex, can be constructed with ETFs, and is unlikely to be ruinous. Not being ruinous can be said of many portfolios, but not necessarily the people who own them. A portfolio concept cannot account for human factors like panicking at the wrong time or having some unforeseen and expensive life event happening at the worst possible time.
If you have a financial plan – these can range from something that looks like a phone book to a simple spreadsheet – then you might have different scenarios involving different accumulated dollar amounts; maybe $X at the low end to $3X at the high end for example. Whatever you end up with is obviously a combination of savings and growth of those savings from investing – the amount saved is far more within your control.
Human factors and savings rates, quite clearly, play huge roles in however your financial situation plays out. Thus, the perfect portfolio for you or for your clients will take these factors into consideration, and, of course, I am using the word “perfect” tongue-in-cheek.
While most people will not read about a portfolio and immediately adopt it as their own, there is utility in reading about someone else’s process, and, perhaps, being influenced in your own process.
This article was written by AdvisorShares ETF Strategist Roger Nusbaum.